Monday, August 10, 2009

From Invictus: I'm Still Not Convinced

So we got a “green shoot” on Friday in the form of “only” a -247,000 print on the nonfarm payrolls and a drop in the employment rate to 9.4% (mostly due to folks just leaving the labor force). When we got a -223,000 (initial) print for April in May 2001, and the unemployment rate was 4.5%, we got commentary like this (via the NY Times): ''These numbers mean that the economy is right now at about zero growth,'' said Peter Hooper, chief domestic economist for Deutsche Bank North America. ''I don't see much of anything positive in this report.'' But that was in the days when -200k (or more) NFP print was considered unacceptable, I guess. Now it’s a cause for celebration.
Here’s the employment situation updated through Friday relative to previous recessions:

(Source: St. Louis Fed)

Maybe it’s just me, but that chart doesn’t exactly make me feel like dancing a jig, even knowing it’s a lagging indicator. Still not liking the glide path, especially given the fact that we’re now some 20 months removed from the recession’s starting point (December 2007).

But let’s move on and talk about what sort of recovery we might eventually see. Bonddad and I recently wrote about why the consumer will probably not be leading the economy out of recession (forgive me for saying so, but I think it was a really good piece).

To add to that file, I’ve replicated below a chart published last week by former ML Chief Economist David Rosenberg, who continues to do stellar work at his new shop, Gluskin Sheff:

Various US GDP Components: Average Contribution to Change in The First Year of Economic Recovery

(percentage points)

(Source: Average of four quarters following quarter in which NBER determined recessions ended.)

In other words, the consumer – through Personal Consumption Expenditures (PCE) – contributes 3.2 percentage points to GDP in the first (usually fairly strong) year of post-trough economic recovery.

That’s simply not going to happen this time around, in my opinion, and here’s another vivid illustration to make that point. PCE are running well below even the worst previous recession of the post-war era:

PCE should be on a decent uptrend by now – just look above at the “average” and “highest” performance. They’re not (uptrending), and it’s simply too important (and too big) a component of recovery to think we’re going to get very far without it. This is why I worry that Q3 is going to be a one-hit wonder.

Among the reasons PCE aren’t on the upswing is this: We know that there’s no organic income growth:


Further, the American consumer is shedding credit like never before. In another – but much less publicized – report released last Friday, we saw that consumer credit, on a year-over-year basis, has contracted by a record $71 billion dollars:

(Source: Federal Reserve)

Given that credit was responsible for fueling much of our recent economic growth, its decline continues to signal a frugal future.

If there was a “green shoot” to be found in Friday’s report it was in Aggregate Weekly Hours, though it was so small as to be almost imperceptible. I’ll highlight it for you below:

NBER Business Cycle Dating Committee member professor Jeffrey Frankel watches this metric very closely, and this is what he had to say: “The latest numbers show that the length of the workweek has begun to rebound from its record low of two months ago. As a result, the BLS reports that total hours worked in the economy did not decline at all in July, for the first time since the financial meltdown of last September. One never wants to read too much into a single report, especially one subject to revision. But when today’s labor news is combined with a variety of other data, it looks likely that the economy is finally at or near the turning point.”

To say that whatever it is the economy’s doing right now is “fragile” is, I think, to understate the case. I continue to look for a driver of growth going forward, and as yet have not found it. When the aforementioned David Rosenberg left Merrill Lynch, he penned some rules to remember. Among the most important, in my opinion, is #12: Get the US consumer right and everything else will take care of itself.” That is why I remain steadfastly focused on the U.S consumer, who is 70% of U.S. GDP and about 20% of GDP worldwide – because no one drives business like the U.S. consumer. And until the U.S. consumer is back on his feet, it’s hard to imagine an environment that will produce any more than subpar growth.

On an unrelated note, the also aforementioned professor Jeffrey Frankel had this to say about the work Obama has done to address the economic disaster he inherited: “In any case, in light of the difficult circumstances, I think Obama has done amazingly well. […] In my view, overall, Obama has gotten far more things right than wrong. He has bravely proposed things that most sensible economists — whether Republican or Democrat — have long favored. Proposing is not always the same as enacting; there is the matter of Congress. But he has tried to get them passed, and has tried to do it in a bipartisan way.”

I would tend to agree.